Catalysts should drive ARYC much higher in 2014. The industry leader, Illumina (NASDAQ – ILMN), trades a whopping 8x FY14 sales and 50x FY14 EPS.With high sales and earnings run-rates due to a recent capital infusion, and the potential of the OvaDx® approval, ARYC should enjoy a premium valuation, especially in light of the IP value.
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Arrayit Corporation traces its roots to the mid-1990’s and enjoyed a rich early history as one of the pioneers and innovators of the microarray industry, which is now one of the fastest and most critical segments of the entire medical arena. Arrayit is a leading life sciences technology company providing a huge suite of tools and integrated systems that empower scientists and clinicians to study all living things, from humans, animals, and plants, to viruses and bacteria. This research is being performed in thousands of government, university, pharmaceutical, biotechnology, and laboratories around the world, where scientists seek to expand our knowledge of the biological functions essential for life.
The Company’s patented tools and trade secrets provide the performance, throughput, cost effectiveness and flexibility necessary to perform the billions of genetic tests needed to extract valuable medical information. This will enable researchers to correlate genetic variation and biological function, which will enhance drug discovery, drug development and clinical research, allowing diseases to be detected earlier and permitting better choices of drugs for individual patients.
The tools are used at the genetic level to elucidate the correlation between gene sequence and biological processes, life science research expands to include the study of the cells, tissues, organs, systems, and other components that make up living organisms. Novel insights into the function of genes and proteins, early stage disease diagnostics, better and safer medicines, and safer and more nutritional crop plants are some of the many aspects of human health empowered by Arrayit technology.
Arrayit has secured its position in the industry by leveraging the company’s widely used patented microarray manufacturing platform and revolutionary VIP™ genotyping technology. Since 1999, Arrayit has built a powerful portfolio of patents, trade secrets, and more than 1,200 life sciences products. The company was featured on the television series NOVA in 2001, received successive appointments to the Inc. 500 list of fastest growing private companies in 2002 and 2003, and has received numerous local awards including the Rising Star award from the City of Sunnyvale and the Silicon Valley Top 50 award in 2003.
As noted in figure at right, many of Arrayit’s 4,000 customers read like a who’s who of the medical, research and academic worlds. In addition to the Company’s 1,200 strong microarray product offering, Arrayit also has developed diagnostic products that leverage its microarray work and take it to the next level. For example, the Company is prepping a novel ovarian cancer monitoring and screening diagnostic test, OvaDx®, for FDA 510(k) submission in early 2014 and other diagnostic tools are in various stages of R&D.
We should note that while Arrayit has been in a relatively slow growth and heavy R&D mode, a recent infusion of capital has enabled the Company to increase sales and achieve cash flow profitability this year and this cash injection has ignited Arrayit. As a result, significantly higher sales growth, profitability, and a series of R&D and diagnostic tool development success should serve as major milestones ahead.
One of the primary reasons for the Company’s success is its deep patent portfolio of 8 awards, with others pending, as well as its short term and long term approach. Management believes that the analysis of genetic variation and biomedical functions will play an increasingly important role in molecular biology, and that by empowering genomic and proteomic analysis, the Company’s tools will advance disease research, drug development, and the creation of molecular diagnostic tests. In addition to developing all types of microarray-based solutions for life science, applied science, and consumer markets, Arrayit supports clinical trials in gathering data for regulatory submissions in the US and globally, and establishing infrastructure to offer products designed and manufactured in compliance with global quality standards for medical devices.
With the progression and growth in personalized medicine, it has become apparent that millions of people will need to be tested for various diseases or traits in order to identify whether or not a disease is present, or to determine compatibility with specific drug treatments. However, testing millions of patient samples, one at a time, would overwhelm laboratory testing facilities and be cost prohibitive. To solve this problem, Arrayit’s President Dr. Mark Schena developed and patented a method to place up to 100,000 individual patient samples on a single microarray substrate slide. That slide is then immersed in a solution that contains the known markers for a specific disease, such as congenital hearing loss, Parkinson’s Disease, Alzheimer’s Disease, etc. and are easy for anyone to read. Should any one of those 100,000 patient samples contain the marker for the disease being tested, a red spot appears, and if not, a green spot appears. This procedure can also identify carriers as yellow spots.
This approach and offering is one of the most unique and critical products in the microarray space, and serve as an important differentiator for the Company. Due to the sophistication of this patented invention, one lab could test thousands of patient samples a day after receiving a sample of DNA from each patient. It is the only method available to the industry that can accomplish this.
The Company’s affordable tools sold to its customers use contract printing technology which can detect all 6,000 known human diseases by analyzing DNA, RNA, peptides, antibodies, etc. with high sensitivity and accuracy in a matter of hours. The Company mass produces these and other tools for the diagnostic and personalized medicine market.
Led by such firms as Affymetrix (NASDAQ –AFFY), Agilent Technologies (NYSE – A), and Illumina (NASDAQ – ILMN), industry research firm Research Moz projects that the microarray industry will enjoy an 18% CAGR and reach the $11.4 billion mark in 2018. Current growth drivers include: ever-growing patient population, increasing understanding of cancer markers and pathways, greater access to healthcare in emerging markets, companion diagnostics solutions to enable personalized medicine, and improved molecular diagnostic approaches.
Interestingly, Arrayit has focused on developing microarray laboratory instruments, glass substrate slides, kits and reagents using an open platform strategy, in contrast to the closed platform formats of its largest competitors. Arrayit’s patented printing technology has become an industry standard for microarray manufacturing, allowing customers to manufacture microarrays of all types including DNA, protein, patient DNA, antibody, antigen, peptide, carbohydrate, and many others. This flexibility differentiates Arrayit’s microarray technology from competitors, who are generally limited to DNA microarrays. Arrayit sells both small-scale microarray manufacturing robots (SpotBot®) and high throughput versions (NanoPrint™). The SpotBot® and NanoPrint™ product lines have been further enhanced to accommodate more stringent requirements for manufacturing protein microarrays.
It should be noted that 2 IP transactions have occurred in the space, including a $90 million IP acquisition fee paid by AFFY for microarray technology. As noted above, given its differentiation, successful patent defense, and long history, it is possible that the Arrayit IP is worth $30-60M, in a sale.
ARRAYIT MICROARRY PRODUCT AND SERVICES CATEGORIES
Arrayit’s revenues are generated through the following major product lines:
It should be noted that the sales breakdown generally is divided into thirds: instruments, tools, and consumables. Going forward, ARYC benefits from the high margin sales of its consumables, which carry high margins. The Company currently sells its products through 56 distributors and direct sales, including through its website which receives 25,000 unique monthly visitors.
DIAGNOSTIC PRODUCTS DEVELOPMENT
Since the microarray market is a core technology used in the diagnostic test arena, it is a natural progression of the business model for Arrayit to introduce products that serve the multi-billion dollar diagnostic testing market. To that end, the Company has developed a novel ovarian cancer monitoring and screening diagnostic test, OvaDx®, for FDA 510k submission in early 2014. There currently is no approved product for the ovarian cancer market and significant demand for an early screening test product exists today. If approved, OvaDx® could lead to a very profitable new line of diagnostic products, for the Company. Ovarian cancer is the 5th leading cause of cancer death in women, with over 22,000 women diagnosed in the U.S. each year. Pre-application test results have been outstanding with tumor histology sensitivity and specificity percentages in the 73% and 100% rates, respectively. Prior to submission, management believes it can consistently generate 90% sensitivity to varying forms and stages of ovarian cancer.
Testing includes taking small blood samples and sending the samples to Arrayit, where the test is completed in less than 3 hours, with a definitive response. Management believes that this improved monitoring and detection could result in an increase in 5- year survival rates from 20% to 80%. The 510(k) submission is expected to occur in 1H14. In addition to the OvaDx®, the Company is developing similar kits for Parkinson’s disease as well.
RECENT EVENTS AND UPCOMING CATALYSTS
The Company recently released 3Q13 financial results and they were markedly better than 3Q12. Revenue of roughly $830,000 was ahead of $547,000, and the Company eked out both operating and net income profits. For the first nine months of 2013, revenue of $2.4M is well ahead of last year’s $1.85M, with net of $135,000 versus a loss of nearly $900,000. For the full year 2013, we expect that sales will approach or be north of $3.0M. Clearly, revenue is ramping up and we envision sales of $5-8M next year, without any contribution from the diagnostic test kit with net income of $1.0M+. The sky is the limit for 2015 and investors can expect a break-out year in terms of revenue, profits, and product development.
One of the primary reasons Arrayit was able to generate positive results was the closing of a small offering which increased working capital by around $1M and we believe that the combination of the cash flow generated from operations and the offering, has jump-started the sales process, and the proof is in the pudding. Going forward, we expect the 510(k) ovarian cancer test submission in early 2014 and management could receive word of an approval sometime mid-year. The submission alone should be a catalyst to move ARYC’s stock higher. Moreover, given that there is no product available on the market and great demand exists for early stage screening, ARYC stands an excellent chance to receive approval, based on its pre-application results. Clearly, this event would drive the stock significantly higher.
Meanwhile, other product development catalysts, including sales such as the recent $129,000 sale in Israel, and CLIA certifications, are key drivers going forward.
In our view, the biggest factors in impeding ARYC’s success are merely execution risk and maintaining profitability while managing the growth. Considering the company has a history of $12.4M in annual sales, we believe this risk to be minimal. A potential negative to the Company’s business model is not receiving approval for the ovarian cancer test. Still, since success is not likely factored into the stock’s market value, we view this risk to the stock as negligible. Competition from larger firms or even from newer entrants with similar approached is another typical concern and is also consistent with firms of Arrayit’s size and standing, but we do not view this as a major impediment given its 20 year history and pioneer status.
VALUATION AND CONCLUSION
Arrayit is one of the original innovators in the fast-growing, and increasingly microarray field. Moreover, Arrayit’s patented printing technology has become an industry standard for microarray manufacturing, allowing customers to manufacture microarrays of all types including DNA, protein, patient DNA, antibody, antigen, peptide, carbohydrate, and many others. This flexibility differentiates Arrayit’s microarray technology from competitors. The Company enjoys solid revenue and earnings growth and momentum is in the Company’s favour, as evidenced by a recent $129,000 sales.
Separately, since the microarray market is a core technology used in the diagnostic test arena, it is a natural progression of the business model for Arrayit to introduce products that serve the multi-billion dollar diagnostic testing market. To that end, the Company has developed a novel ovarian cancer monitoring and screening diagnostic test, OvaDx®, for FDA 510(k) submission in early 2014. With no approved ovarian cancer tests in the market, an OvaDx® approval could lead to a very profitable new line of diagnostic products. Ovarian cancer is the 5th leading cause of cancer death in women, with over 22,000 women diagnosed in the U.S. each year.
In today’s technology world, IP is king and drives value for companies of all sizes. Based on its IP alone, Arrayit is incredibly undervalued. ARYC has successfully defended its deep and foundational patent portfolio and similar industry patents have indicated a value of $90M or more in recent transactions. Therefore, the ARYC patent portfolio alone could prove to be worth $1.00 - $2.00 per share in a sale of the Company.
With a series of catalysts such as the OvaDx®, and high valuations for comparables such as Illumina (trading a whopping 8x FY14 sales and 50x FY14 EPS), and its own recent and pending successes, we believe that ARYC should enjoy a premium valuation, especially in light of the IP value. We rate these shares Speculative Buy with a $3.00 price target.
Recent Trading History For ARYC
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SENIOR ANALYST: ROBERT GOLDMAN
Rob Goldman founded Goldman Small Cap Research in 2009 and has over 20 years of investment and company research experience as a senior research analyst and as a portfolio and mutual fund manager. During his tenure as a sell side analyst, Rob was a senior member of Piper Jaffray's Technology and Communications teams. Prior to joining Piper, Rob led Josephthal & Co.'s Washington-based Emerging Growth Research Group. In addition to his sell-side experience Rob served as Chief Investment Officer of a boutique investment management firm and Blue and White Investment Management, where he managed Small Cap Growth portfolios and The Blue and White Fund.
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